Internal Control
Internal Control Definition
Internal control is broadly defined as a process, effected by an entity's board of trustees, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: 1. Effectiveness and efficiency of operations 2. Reliability of financial reporting 3. Compliance with applicable laws and regulations 4. Safeguarding of assets
Internal control consists of five interrelated components:
* Control environment - The control environment includes the integrity, ethical values, and competence of the entity's people and is the foundation for all other components of internal control. * Risk assessment - Every entity faces risks that must be identified, analyzed, and managed to achieve its objectives. * Control activities - Control activities are the measures used to help ensure that management directives are carried out and that risks are addressed. They take many forms including policies and procedures, approvals, verifications, reconciliations, performance reviews, security measures, and segregation of duties. * Information and communication - Information systems must be in place to identify, capture, and communicate relevant information in a form and timeframe that enables people to carry out their responsibilities and maintain accountability for the entity's assets. * Monitoring - The entire internal control process must be monitored and the quality of its performance assessed as a part of regular management and supervisory activities. Corrective actions must be taken whenever the system does not perform as intended.
Types of Internal Controls: 1. Detective:
Designed to detect errors or irregularities that may have occurred.
2. Corrective:
Designed to correct errors or irregularities that have been detected.
3. Preventive:
Designed to keep errors or irregularities from occurring in the first place.
Limitations of
Internal control is broadly defined as a process, effected by an entity's board of trustees, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: 1. Effectiveness and efficiency of operations 2. Reliability of financial reporting 3. Compliance with applicable laws and regulations 4. Safeguarding of assets
Internal control consists of five interrelated components:
* Control environment - The control environment includes the integrity, ethical values, and competence of the entity's people and is the foundation for all other components of internal control. * Risk assessment - Every entity faces risks that must be identified, analyzed, and managed to achieve its objectives. * Control activities - Control activities are the measures used to help ensure that management directives are carried out and that risks are addressed. They take many forms including policies and procedures, approvals, verifications, reconciliations, performance reviews, security measures, and segregation of duties. * Information and communication - Information systems must be in place to identify, capture, and communicate relevant information in a form and timeframe that enables people to carry out their responsibilities and maintain accountability for the entity's assets. * Monitoring - The entire internal control process must be monitored and the quality of its performance assessed as a part of regular management and supervisory activities. Corrective actions must be taken whenever the system does not perform as intended.
Types of Internal Controls: 1. Detective:
Designed to detect errors or irregularities that may have occurred.
2. Corrective:
Designed to correct errors or irregularities that have been detected.
3. Preventive:
Designed to keep errors or irregularities from occurring in the first place.
Limitations of